Chapter 1 Flashcards
(19 cards)
What is the separate entity assumption?
A business is always treated as being separate from the owner. All transactions done by the owner are separate from the entities transactions.
Define accrual accounting.
Accrual accounting is when expenses are recognised when they are incurred and income is recognised when it is earned. Neither of these have necessarily been paid with cash.
What are two ways of financing a business?
Equity financing or money contributed by the owner of the business. (internal)
Debt financing, borrowings (loan) or money provided by somebody else. (external)
What are 4 factors to include when considering a loan?
The ability of the business to pay interest repayments.
The purpose of the loan? Long of Short term?
The ability of the business to generate the necessary cash for loan repayments.
The effect of taxation and possibly inflation on the business.
Define gearing and what it means to be highly geared?
Gearing is the relationship between an entities equity and borrowings. An entity with a relatively high level of borrowings is said to me highly geared.
Name some types of long term financing (6)?
Equity/capital financing Leasing Hire/Purchase Debentures Unsecured notes Long term loan
Name some types of short term financing (5)?
Bank overdraft Short term loan Short term money markets Supplier Credit Factory of debts/accounts receivable
Name the 3 types of businesses.
Trading, Service and Manufacturing business.
What is management accounting?
Management accounting is the process of producing reports and providing financial information useful in decision making in day-to-day management of a business. Reports (SPFR’s) are detailed and compare actual performance with budget predictions.
What is financial accounting?
Financial Accounting is the process of producing GPFR’s used by parties external to the entity, such as shareholders, investors, suppliers, customers, employees and the government.
Name some external users of financial documents (6)?
Investors Owners Suppliers Lenders Governments Employees
Define SAC1 (Defines a ‘reporting entity’)
A reporting entity is a financial organisation that must comply with standards in the production of its financial reports. A reporting entity, according to SAC 1, is an organisation that has users of its reports who rely upon those reports as their sole or main source of information to assist them in making decisions about that organisation.
Define SAC 2 (Defines GPFR’s)
SAC 2 defines a GPFR as a report whose users rely on it as their sole or main source of information to assist their economic decision making. GPFRs must comply with accounting Standards. The purpose of GPFRs as outlined by SAC 2 and the framework is to enable:
- Users to assess the financial performance of an entity
- Users to assess the financing and investing decisions made by the entity
- Those responsible with managing the entity to show compliance with requirements
Define Associated Accounting Standards (AASB)
A set of principles and rules which all producers of GPFR’s must follow.
What legislation brought about the AASB?
Corporations act 2001
What is internal control?
Systems put into action within an organisation to ensure that assets are safeguarded and used as effectively as possible.
Why is it necessary to implement internal control (3)?
To safeguard assets
Use assets as effectively and efficiently as possibly
Accurate and timely information provided to management
What are the principles of internal control (5)?
Segregation of duties Established responsibilities Keeping records Security of assets/records Reliable Employees
What is an internal audit?
An internal audit is the continual review of the procedures, systems and policies of the business to ensure that they are being adhered to and working efficiently and effectively.
